Question

a. What is short-term credit, and what are the major sources of credit?

b Is there a cost to accrued liabilities? Fully explain your rationale.

c. What control do the company's have over accrued liabilities?

d. SPP is considering using secured short-term financing. What is a secured loan? What types of current assets can be used to secure the loans?

e. What are the differences between pledging receivables and factoring receivables?

Answer 1

Answer(a): Short term credit- It is the loan, taken by business for less than one year duration. This credit is taken to meet the short term requirements of the business. This is current liability for a business because it is less than one year.

Sources of short term credit- Are as following:

1. Credit cards- This is a plastic money through which people can make purchases, pay bills on credit and they have to make the payment later. High Interest is charged on credit card's loan limit.
2. Commercial papers- These are available for large firms with good credit history.
3. Customer advances- This is famous in the business, company can alter the payment terms of its customer if customer makes a part of payment in advance.
4. Factoring- It is the use of an entity's accounts receivables (who is borrowing funds), as the basis for financing arrangement with a lender.
5. Accounts payable delays- Company can delay supplier's payment but supplier may charge higher prices for the product.

Answer(b): Accrued Liability- It is an expense that a business has been incurred by a company but the amount has not been paid for the same.

Cost of Accrued liability- Yes, There is a cost for accrued liability. Accrued interest that is payable on interest may see a penalty or late fee. Company may have to pay additional amount and arrears for accrued management's salary and bonus. Sometimes interest is also charged on the accrued liabilities.

Answer(d): Secured short-term financing- As the name suggests, secured short term financing is the short term loan that is due within one year and is secured by current assets.

Secured short term loan is secured by Accounts receivables and inventory. Company has to pledge accounts receivables and inventory as pledge. Accounts receivables are liquid in form that is why, it is taken as pledge.

Answer(e): Differences between pledging receivables and factoring receivables-

Pledging receivables- Company pledges accounts receivables for raising short term credit that is also called line of credit. Company uses receivables as collateral. It is less expensive than factoring receivables.

Factoring receivables- It is the act of selling a company's accounts receivables to other company at discount and then the other company collects payment of accounts receivables.

It is expensive than pledging receivables.